On June 3, US President Joe Biden signed into law a debt ceiling Bill passed by Congress, two days before the Treasury Department estimated it would run out of money to pay debts. The new deal suspends the debt ceiling until January 2025.
However, the next concern is the potential flurry of Treasury issuance (more than US$1 trillion or $1.35 trillion in the coming three to six months), which may compete with banks for cash and push up the shortterm funding rates.
Even so, OCBC O39 interest rates strategist Frances Cheung does not expect a material upward impact on bill yields as firstly, these issuances represent delayed supply, rather than being entirely extra. Next, the US Treasury may pace out issuances or lower cash target, and last but not least, some funds will be mobilised from the US Federal Reserve’s reverse repos.
Also, Fed governors’ Philip Jefferson and Patrick Harker have signalled a potential “skip” to rate hikes at the June Federal Open Market Committee (FOMC) meeting, notwithstanding the solid US economic data from the upward revision to 1Q2023’s GDP growth, strong labour market data and sticky core inflation pressures. OCBC expects the Fed to hold rates for the rest of the year, with the easing cycle starting in 2024.
Overall, 10-year treasury yield was up 22 basis points month-on-month to 3.64% in May. In the same month, US credit markets observed a slight recovery with a pick-up in new US issuances, both in the investment grade as well as the high yield market. US investment-grade issuances rose sharply and totalled around US$155 billion, more than double month-on-month from around US$73 billion. US high-yield issuances rose slightly to around US$23 billion, up by around 10% month-on-month from around US$21 billion.
Rates and risks supress Asia (ex-Japan) issuance volumes
Amid rates volatility and concerns on systemic risks (such as the possibility of a US regional banking crisis), Asia excluding Japan G3 currency bonds year-to-date issuance dried up as of May 31, 2023, at US$73.9 billion, 31% lower than the same period last year (US$107.2 billion).
Asiadollar credit saw rising dispersion in May, with the Bloomberg Asia USD IG Index average option-adjusted spread tightening by around 7 basis points month-on-month to 128 basis points and the Bloomberg Asia USD High Yield Index average OAS widening by around 45 basis points month-on-month to 1,023 basis points.
Ongoing negative news on China high-yield credit, in particular property issuers and local government financing vehicle, continue to influence sentiments. In addition, lagging primary market issuances in Asiadollar are providing technical support for Asia investment-grade credit amid the US debt ceiling issue alongside uncertainty in US interest rates.
See also: US bond market halts brutal run as buyers pounce on 4.5% yields
For Asia high-yield markets, bonds of Wanda Properties Overseas, a unit of Dalian Wanda Group (Wanda), plunged (for example: DALWAN 7.25% ’24s fell as much as 30 points to 42 before recovering to 57 on May 31, 2023) after Wanda revealed its plans to downsize some business units and its management unit’s IPO application lapsed for a third time at end-April 2023.
Besides, sentiments for Asia high yield were also further dampened by the rising credit risks of China’s LGFV after Kunming Dianchi, which is owned by Kunming’s local government, narrowly avoided a bond default after a last-minute payment on a RMB1.0 billion ($189 million) bond. Per Bloomberg, China’s LGFV local RMB bond market amounted to an outstanding amount that is equivalent to US$2 trillion as at the end of May.
Asiadollar (excluding Japan) US$ issuances saw meaningful recovery in May with issuance totalling around US$14 billion, up from around US$6 billion issued in the prior month, albeit concentrated in select investment-grade issuers. Asiadollar (excluding Japan) USD issuances could trend upwards in June after a new debt ceiling Bill passed by the US Congress.
Stable SGD credit market
Singapore-dollar bonds issuance year-to-date as of May 31 was stable at $8.1 billion, a gain of 2.5% compared to the same period last year. However, it seems that issuers are more receptive to the idea of refinancing via bank loans instead of issuing new bonds.
Based on our findings, a total of $1.13 billion bonds matured in May, yet none of these issuers (for example, Tata Steel unit Abja Investment, ESR-LOGOS REIT, OUE, Suntec REIT, Frasers Centrepoint Trust, Mapletree Industrial Trust, Starhill Global REIT) came to credit markets. For the REIT issuers, this implies that refinancing was mainly done via the bank loan market, given that a low cash balance is typically maintained internally.
In May, new issuances in the Singapore dollar space remained stable month-on-month at $1.05 billion, versus $0.99 billion in April. The main issuance was from HSBC Holdings, which priced $600 million of six-year bonds, with an issuer call option at the end of the fifth year, while Thomson Medical Group priced $120 million of five-year bonds, with an issuer call option at the end of the first year. A call option held by issuers allows issuers calling on a bond before the maturity date. This option is useful should interest rates go significantly lower and the issuer can refinance at a lower cost, rather than continuing to pay the existing interest rate.
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Cagamas Global, wholly-owned by Cagamas, the national mortgage corporation of Malaysia, priced a bond totalling $150 million. Moving into June 2023, the markets await the Fed’s next steps during the upcoming FOMC meeting and the potential impact from the flurry of Treasury issuance in the coming three to six months. Recession and rates continue to make for a selective credit space.
Singapore-focused REITs continue to demonstrate good operational statistics in 1Q2023, though interest coverage has weakened amid rising interest rates. Within the industrial REITs, rental reversion is generally positive with occupancy generally remaining at high 90% levels. Meanwhile, for the commercial REITs in Singapore, rental reversion is similarly generally positive within retail and office.
That said, average aggregate leverage of the Singapore-focused REITs as of March 31 increased by 40 basis points quarter-on-quarter to 38.2%. Meanwhile, the average adjusted interest coverage ratio (including perpetual distribution) for the trailing 12 months to March 31 worsened by 0.5 times quarter-on-quarter to 3.68 times.
In the secondary market, the Singapore-dollar credit market gained 0.74% month-on-month despite one-year to 10-year Singapore Overnight Rate Average rates rising 15 to 23 basis points month-on-month in May. Credit spreads tightened 22 basis points month-on-month with improvements evidenced across all segments, led primarily by Additional Tier 1 (AT1) bank capital instruments, corporate perpetuals, Tier 2 bank capital instruments and other non-perpetual subordinated bonds, while mid and longer tenor bonds lagged.
Supporting the improvement in AT1 bank capital instruments in May has been a general recovery in sentiments towards financial institutions, with Japanese mega banks issuing AT1s in the yen space.
Recent earnings announcements have highlighted a flight to quality given the banking sector volatility in March, as financial institutions with solid underlying fundamentals are seeing ongoing earnings momentum and stable to improved liquidity from deposit inflows and funds inflows into wealth management segments.
This has seen several positive rating actions for financial institutions under our coverage. Regulators are also pursuing a relook at banking regulations that relate to stress testing and liquidity requirements in the US, while the European Banking Authority held talks on ways to boost investor interest in the AT1 market.
Chin Meng Tee, Andrew Wong, Ezien Hoo and Wong Hong Wei are credit analysts with OCBC
